Stage set for EU showdown with Microsoft over discount licences

The European Commision is considering asking Microsoft to hand over a confidential memo that outlines the software giant's aggressive sales strategy to kill off Linux by giving away its software.

The International Herald Tribune and New York Times newspapers reported that Microsoft's top salesman Orlando Ayala last July circulated a confidential memo to senior executives of the company around the world laying out a strategy to offer big discounts to governments and institutions, and in some cases, to offer the company's software for free.

Ayala is reported to have told colleagues that the aim of the strategy is to dissuade clients from switching to rival PC operating system providers - and especially to Linux, the open-source software platform which is starting to steal market share from Microsoft in the server software market.

"Under no circumstances lose to Linux," Ayala is reported to have written in the memo dated 16 July 2002.

Most discounting is viewed as normal competitive business behaviour, but European Union antitrust law prohibits companies that dominate their markets from offering big discounts if their main aim is to exclude rivals, or if the discounts are only offered to certain clients.

Dominant firms can only justify discounts under EU rules if they can prove that the discounts are designed to generate cost savings, rather than purely being a way to beat off the competition.

The European Commission, the executive body of the union charged with enforcing antitrust laws, has imposed heavy fines on several companies including French tyre maker Michelin, British Airways and the food maker Irish Sugar, for abusing their dominant positions with unfair discount or rebate schemes.

Commission spokeswoman Amelia Torres said the newspaper reports "make interesting reading", but she declined to comment on whether the commission will follow up by sending Microsoft a so-called Article 11 letter, roughly the equivalent to the subpoena handed down by US courts.

"I can't prejudge what the commission will or will not do" in response to reports of questionable discounting by the world's dominant software firm, she said.

The 16 July memo, together with subsequent internal e-mails the newspapers claim to have seen, could provide grounds for a new antitrust lawsuit against Microsoft in Europe, according to people close to the commission and to lawyers representing Microsoft rivals.

An existing European Commission antitrust lawsuit against Microsoft accuses the company of using its dominant position in operating systems software for PCs to gain a similar dominance in the market for network server software.

It also accuses the firm of abusing its dominant position by bundling in its Media Player software program in with its ubiquitous Windows O/S software, thereby stifling competition in the market for video and audio playing software.

Discounting is not mentioned in the existing Microsoft case, nor is it mentioned in a fresh complaint to the European Commission by Microsoft rivals earlier this year concerning Windows XP, said Thomas Vinje, a lawyer acting for some of Microsoft's main rivals.

He said that the allegations in the articles could overlap with part of the commission's existing lawsuit if it turned out that Microsoft was discounting to win contracts in the workgroup server software market - a segment under special scrutiny in the European lawsuit.

But he added that the commission is unlikely to want to delay a ruling in the case, which is expected by the end of this year.

The European regulator would be more likely open a separate investigation, Vinje said, but he added that sending an Article 11 letter "is a very serious thing to do. I imagine they would take at least a couple of weeks before deciding to do that".

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